Fed buys AIG

It’s about time the Federal Reserve bought something. A week ago the Treasury Department effectively bought Fannie Mae and Freddie Mac and, in return, they got a bunch of stock options and hard-to-trade mortgage securities that they’ve probably been rummaging through for the last week, by now, surely aware of how little they’re really worth.

But, they’ve got the stock options.

As reported by the New York Times a short time ago, the Fed is readying a $85 billion "loan" to giant insurer AIG and, for its generosity, it will get a boatload of stock options and some unspecified amount of hard-to-trade insurance derivatives.
The details:

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that would give it an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.
…
The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.

Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.

But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.

It seems Ben Bernanke’s "tough love" lasted less than six hours. Well, that is, not counting the shunning of Lehman Brothers over the weekend, whose employees must feel horrible at the moment, seeing the Fed’s warm embrace bypass them again.

Probably like you, I’m anxious to see the new Fed balance sheet.